The Federal Government thanks you + investment hot spot

Hi everyone,

First up, some news from me. In early 2024, I’m hosting a new season of Your Money & Your Life, the TV show where I help everyday Aussies spend, invest and manage their money better. 

This season we’re introducing Kochie’s Budget Challenge. It’s a segment where I help people navigate the cost-of-living crisis. The aim is to improve their money management by going through their biggest bills and financial leaks to get a better deal and save big dollars. 

We’re looking for singles, couples, retirees and families who’d be keen to have me pop over to go through your bills to see where we can make huge savings on things like mortgage, health insurance and more. You must live in Sydney to take part. Email me now to express your interest: [email protected].

The Federal Government thanks you

While your household budget may be doing it tough, you can take comfort in the fact that the country’s budget is doing much better… thanks to you. 

The simple fact is your wage rises have pushed you into a higher tax bracket, you’re paying more income tax into the Federal Budget… and the government is loving it. 

Wednesday’s mid-year economic update revealed by the Federal Treasurer shows the $13.92 billion deficit forecast just last May has been revised now to a $1.11 billion deficit. That’s a $12 billion improvement after just six months of the new financial year. 

But even that new figure is rubbery. A lot of economists reckon it will be a surplus of $20 billion by the end of June… for the 12 months to the end of last October the surplus was running at almost $26 billion so revenue is strong. 

The strong budget results are because the government is once again seriously underestimating the price of commodity exports such as iron ore and coal. The record level of personal income tax revenue has also been enormous. 

For those saying “I’d rather keep more of my money to pay for increased mortgage repayments and fight the impact of inflation”, I completely understand. 

The focus for me is what the government does with the windfall. And it seems they are attacking government debt, which will peak in June 2027 at $623 billion instead of the forecast $703 billion. 

The update also outlined additional funding for new housing (about time), infrastructure and NDIS.

Jobs just starting to weaken

Inflation, consumer spending and jobs have been top of the Reserve Bank’s agenda when it comes to interest rate decisions. 

Consumer spending is weak, inflation is trending down… so what about jobs? 

Latest figures were out yesterday and the jobs market is weakening as well. 

While it’s true the Aussie economy added a whopping 61,500 jobs in November, smashing consensus market expectations for the addition of 11,500 new roles, the unemployment rate rose from 3.7 per cent to 3.9 per cent – the highest since May 2022.  That’s because Australia’s workforce participation rate climbed to a record high of 67.2 per cent, boosted by strong population growth and more people looking for work. 

According to CommSec, record inflows of overseas migrants and international students have boosted the supply of labour to meet employer demand. So, while employment has increased 3.2 per cent over the year to November, the labour force grew by 3.6 per cent, underscoring the RBA’s concerns about strong domestic demand. 

Interest rate cuts on the way… the big question is when? 

The US central bank has made a major pivot away from talking tough about further interest rises and is now openly hinting at interest cuts in 2024.

On Thursday morning our time the Federal Reserve Bank kept US interest rates on hold as expected, but then said they were expecting to cut rates 0.75 per cent over 2024 if inflation kept trending down as expected. It was reinforced by Fed chair Jerome Powell at a press conference after the announcement. 

Naturally the pivot sent financial markets into a spin. Sharemarkets leapt higher, bond yields dropped. 

At the start of the year there were dire predictions of a major economic recession in the US, which simply hasn’t eventuated. The Fed has done a great job in bringing down inflation, keeping Americans in jobs and engineering a soft economic landing.

Naturally, when the US starts hinting at interest rate cuts Australians gets excited about when we will follow. Pessimistic economists say not until 2025 while more optimistic economists are predicting cuts to starts from the middle of next year. 

Given the way this year has panned out, you’d have to lean towards the optimists. But as I’ve been saying, 31 January, when the December quarter CPI figure is announced, is for me the crucial day and data point which will bring some clarity on rate cuts. 

If the December quarter CPI comes in below expectations, rate cuts shouldn’t be that far away. If the figure is above expectations, we’ll need to wait a bit longer. 

It’s worth noting the impact of rate increases in Australia is a lot more severe than in the US because most Australians are on variable mortgages and feel the effects of a rate increase immediately. In the US, home owners are on fixed rate mortgages so the pain is delayed or not felt at all.

Consumers taking a conservative view from the bunker

Without stating the bleeding obvious, Australian consumers are feeling the pinch from rising interest rates and high inflation. They’re reigning in spending and being very cautious. 

You can’t argue that there is a need for caution. That’s why I always follow one question in the consumer confidence figures: “where is the wisest place to save?” I reckon it says everything about how we’re feeling. 

Look at the graph below. A record number of Australians believe the wisest place to save is “savings, pay down debt, superannuation”. Can’t argue with that. 

Investing in shares is now higher than in property.

Shock horror, banks are no longer the financial ogres!

Every time interest rates rise we all focus on the big banks for passing on the rate hike. We focus our anger on the banks for simply following what the RBA has decided. 

But, and it pains me to say this, the banks have been very generous in this rate hiking cycle buy NOT passing on the full RBA rate hikes. That’s how much competition there is in the home loan market. 

Have a look at this chart tracking the RBA rate rises against the average home loan rate. Banks are no longer the ogre.

Superannuation funds bounce back on sharemarket improvement

The Santa Rally on the sharemarket (up 5 per cent in the last three weeks) has been great for your superannuation fund. 

Leading research house SuperRatings estimates the median balanced option will deliver a return of 3.1 per cent for the month of November. 

The median growth option similarly experienced a strong month with an estimated 3.5 per cent gain, while the median capital stable option experienced a more modest return of 2 per cent owing to a lower exposure to shares.

November’s strong performance was also reflected in pension returns, with the median balanced pension option returning an estimated 3.4 per cent. The median growth option is estimated to see a gain of 3.9 per cent for the month, while the median capital stable pension option is estimated to deliver a 2.3 per cent return.

The estimated gains in November are set to recover most of the losses over the last few months, setting up a modest, but positive, scene for most members as they approach the halfway point of the financial year. SuperRatings estimates the median fund will provide members with a 1 per cent gain for the first five months of the financial year. 

Despite modest returns over the second half of the year, funds are on track to deliver a 6.8 per cent return after the first 11 months of the calendar year for the median balanced option. 

While the final result will be dependent on December’s performance (in which shares are having another bumper month), members are expected to see a reasonable positive return for the calendar year, which may be similar to the estimated 6.4 per cent year for the median balanced option since 2000.

Perth is Australia’s strongest property market

All the major property research groups unanimously agree Perth is finishing the year as Australia’s best performing property market and is set to hold that position for 2024. 

According to SQM Research’s Boom and Bust report, Perth values will rise another 5-9 per cent in 2024. 

In the year to November, CoreLogic estimates Perth home values increased 13.5 per cent and in the three months to November by 5.4 per cent. 

Ray White research points to the expensive suburbs leading the charge. Cottesloe has seen its median price jump by more than $380,000 over the past 12 months.

Interestingly however, many of the very affordable suburbs are also seeing big jumps. Bibra Lake is one of the strongest growth suburbs in the city. It had a median of just $575,000 last year, now increased to $690,000. In percentage terms, it is moving far quicker than most of the premium suburbs.  

The big jump in pricing in these affordable suburbs is partly being attributed to interstate investors. While difficult to track, anecdotally there have been many reports of these buyers paying well above market, sometimes sight unseen. Rental yields are high and the relatively low price makes it easier to borrow. 

Another driver, according to Ray White, is that construction costs in Perth have rapidly outpaced house prices over the past two years. Buying an established home in these low-cost areas is now looking like good value.  

While house prices have increased by 20 per cent in Perth over the past two years, construction costs have increased by 40 per cent.

Nationally, construction costs have risen so much that in many places replacement costs are now much more expensive than established homes are currently selling for. Capital city house prices have risen by 11 per cent while construction costs have risen 27 per cent.

To increase the flow of money into building new homes, construction costs have to come down significantly or established houses need to rise. With construction costs moderating, but not dropping any time soon, it is looking like prices will need to continue to rise to ensure greater levels of housing supply.

CoreLogic claims home values across the combined capitals rose 0.6 per cent in November. Monthly growth across the capital cities has broadly eased since recording a recent high of 1.5 per cent in May and is generally slowing nationally because of higher interest rates and a jump in listings.

Adelaide, Brisbane and Perth home values are currently at a record high.

It is taking slightly longer to sell properties. The rate of vendor discounting now looks to be steadying at 3.3 per cent, new listings have begun a seasonal slowdown, and total listings are gradually lifting, but remain 17.7 per cent below the historic five-year average.

The final clearance rate across the combined capital cities market is currently trending lower.

CoreLogic’s chart of the month, which tracks house and home unit rentals across all capital cities, is fascinating.

The ‘Battle of the Generations’ verdict is in

The cost of buying a home in our capital cities is now 14 times our annual income, up from five times the annual income in 1990.

Who’s doing it tougher, young homeowners today or their Baby Boomer parents who were paying 17 per cent mortgage interest?

It’s the intergenerational war of words that has been splitting families for decades.

I used to whinge to my parents and now my adult kids are doing it to me. Frankly, I don’t think it achieves much…. but here’s the answer.

It obviously depends on when the comparisons are made. For example, 18 months ago when interest rates were low, Baby Boomer parents had it tougher.

But today, after the sharp interest rate rises, young homeowners are doing it tougher.

While home owners in the 90s faced 17 per cent home loan rates, house prices were much lower.

Borrowers back then didn't have to save for big deposits and they could borrow less to buy a home. The key difference between the 90s and now is that the average mortgage size has risen six times faster than wages.

The average loan size in Australia was $67,700 back in the 90s, and now it's $593,000… even more if you’re buying in high-priced Sydney and Melbourne.

So Mum and Dad, the youngsters do have a point.

As a result, more Baby Boomer parents have been chipping in to help their adult children get a foot on the ladder. 

A Compare the Market survey in April found that 26 per cent of millennial homeowners had received help from their parents to purchase property.

Next week I’ll show how you can help ease your child’s pain when getting into the housing market.

Stock of the Week: Fortescue Mining

Despite all the concern about China and a falling iron ore price, the share price of Fortescue climbed to all-time records this week. It has been a stellar year for the company, which still pays a dividend yield of over 6 per cent even at these lofty share price levels. 

Even with the iron ore price down at $US120-130 a tonne, Fortescue can dig the stuff out of the ground at $US20 a tonne. Even though its deposit is relatively low grade, Fortescue is one of the lowest cost iron ore miners in the world. 

We discussed the company on my sharemarket show The Call (on the ausbiz.com.au business streaming service) this week. 

Michael Gable from Fairmont Equities has been a fan of the company for a long time but reckons at these record levels it’s worth taking some profits and then buying back in on any future pullback in the share price.